New Functionalities for Options Market and Enhancement for BAX Contract on SOLA®
The Montréal Exchange (MX) announces it will launch its new Options Market Implied Pricing and User-Defined Strategies functionalities on SOLA. MX will also provide enhancement for the BAX Futures Implied Pricing functionality through real-time dissemination of implied prices.
These functionalities will be implemented in the production environment on March 25, 2011.
User-Defined Strategies
MX will implement user-defined strategies (UDS) for the options market to offer approved participants the ability to create customized options strategies and expose them to all approved participants via HSVF.
To create a UDS, the participant sends a message containing the parameters of the UDS to MX's trading system in any of the supported protocols (SAIL, FIX or STAMP). The UDS functionality will then validate the strategy created. If accepted, the new UDS will be broadcast to the market via HSVF, similar to the broadcast of any instrument. A throttling mechanism limiting the number of strategy instruments created is also in place to minimize any abuse.
MX will determine from time to time the strategy types that will be accepted by the UDS functionality, and will notify the market of such acceptance criteria. Initially only two-legged UDS will be accepted; however, it is planned to extend this to four-legged strategies over time. The initial list of acceptable strategy type is given below.
| Strategy | Example |
|---|---|
| Call spread | Buy call and sell call |
| Put spread | Buy put and sell put |
| Straddle | Buy call and buy put with same expiry month and same strike price |
| Strangle | Buy put and sell call with same expiry month and different strike price |
| Synthetic position | Buy call and sell put with same expiry month and same strike price |
| Synthetic position with split strikes | Buy call and sell put with same expiry month and different strike price |
| 1:2 ratio call spread | Buy one call and sell two calls |
| 1:2 ratio put spread | Buy one put and sell two puts |
| 1:3 ratio call spread | Buy one call and sell three calls |
| 1:3 ratio put spread | Buy one put and sell three puts |
| 1:4 ratio call spread | Buy one call and sell four calls |
| 1:4 ratio put spread | Buy one put and sell four puts |
MX is pleased to announce that the following independent software vendors will be ready to offer the UDS functionality at the March 25th launch date, allowing approved participants to enter a user-defined strategy:
- Orc Software
- SunGard
Other vendors have indicated that they are in the process of developing the UDS functionality. Please contact your independent software vendor directly for more information.
With the introduction of UDS, MX will initiate intraday listing. This will allow Monitoring Operations Department (MOD) to create single option lines and strategies, which will be immediately available for trading. The creation of new series and strategies will be processed as usual in the HVSF market data feed. All clients must ensure that their market data applications are able to receive and process the new intraday instruments and strategy instruments.
Implied Pricing Algorithm
On April 24, 2009, the Montréal Exchange (MX) implemented an implied pricing algorithm (IPA) for Three-Month Canadian Bankers' Acceptance Futures (BAX). As part of MX market evolution strategy, the IPA will be activated for equity options, currency options, options on exchange-traded funds and index options (hereinafter referred to as the "options market").
In addition to the activation of the IPA for the options market, implied prices will be disseminated through the High Speed Vendor Feed (HSVF) for the BAX and the options market.
An implied order is an order generated synthetically from two outright regular orders that are already registered in the order book. These two orders could be constituted either from two individual legs or one individual leg and a strategy involving that leg. Two types of implied orders exist:
Implied "in": Implied "in" orders are derived from regular posted orders on individual legs. Implied "in" orders allow to create a synthetic strategy market available for trading to all market participants.
Implied "out": Implied "out" orders are derived from a combination of an existing regular strategy order and an existing outright order in one of the underlying individual legs. This type of order allows creating a synthetic market on the other underlying leg.
The price/time algorithm (FIFO) is respected at all times within the context of the implied pricing market model whereby all regular orders (non implied) always have price/time priority over implied orders.
Visit the implied pricing algorithm Web page for more information.
These initiatives will provide market participants with a new price discovery dimension and reduced execution risk for legging-in strategies, thereby enhancing services to options trading customers.
Should you require technical assistance or wish to carry testing in our development environment, do not hesitate to contact our Technical Help Desk at 1-877-588-8489 or by e-mail at samsupport@m-x.ca.
For all business related questions, please contact our Customer Relations representative at 1-866-871-7878 or by e-mail at info@m-x.ca.
Claude Cyr
Senior Vice-President, Financial Markets
Montréal Exchange